The widespread availability of Internet-based securities trading has given rise to the day trading phenomenon. In day trading, individuals (who typically are not securities professionals) engage in short-term speculative trading of individual securities. Based on news, rumors, or momentum, these individuals buy small volumes of volatile securities and attempt to generate returns by selling them as they move up or down over the course of a single day, and in some cases a few days. Traditional securities markets do no support the needs of this type of investor. They are structured to serve the needs of investors who buy large volumes of securities and hold them for a considerable period of time. As a result, day traders incur unnecessarily high transaction costs and suffer the consequences of uncertainty with regards to the precise prices of the trades they wish to make.
Traditional securities markets require a counter-party for every trade. Extremely sophisticated trading systems, assemblages of robust networks, highly reliable hardware, and complex software, work to match buyers and sellers for every transaction.
Unfortunately, this process introduces two problems for the day trader. First, the required infrastructure and participation of multiple intermediaries makes the cost of executing a trade relatively high, on the order of 10 USD. Second, because the process requires a counter-party for each trade, a day trader does not always get the exact the price quoted by the market. Clearing trades involves matching the pipelines of buy and sell orders based on their bid and ask prices as well as their size. Often, delays incurred by the trading system or mismatches in order size result in day traders buying or selling at a slightly different price than they thought. Because the day trader makes returns on relatively small price differences in the buy and sell trades, such differences can greatly decrease the overall return.